Weighted alpha isn't necessarily meant to complement other technical indicators; instead, it helps technical investors and fundamental investors identify stocks to which they should apply their investing strategies. Stocks that have shown recent promise are highlighted by a strong weighted alpha. This sends a signal about a potentially profitable asset.

What Weighted Alpha Means

Weighted alpha is a derivation of the alpha metric used in modern portfolio theory (MPT). The standard alpha metric measures how well a stock has performed over a specific period of time, normally one year. Alpha is normally calculated by the risk-adjusted performance of an asset compared to a benchmark index.

To transform normal alpha into weighted alpha, a higher weight is applied to more recent stock price action and a lower weight is applied to less recent stock price action. This should emphasize current information and provide a more accurate representation of the stock's current performance prospects.

Using Weighted Alpha With Other Indicators

The closest corollaries to weighted alpha in technical analysis are momentum indicators. Those momentum indicators can be used to finish what weighted alpha starts. In other words, weighted alpha helps technical investors discriminate between which stocks are worth applying other indicators to analyze.

Examples of common technical momentum indicators include the moving average convergence divergence (MACD), the relative strength index (RSI), the Aroon oscillator and the average directional index (ADX).

This metric can also be used as a confirmation tool on the back end of other analyses. For example, another technical indicator may suggest that there is a profitable entry point for Stock ABC; use weighted alpha to add some confidence to the move.

Just because a stock exhibits a strong weighted alpha does not guarantee that it will post gains in the future. It does suggest that there is bull momentum and that there has been activity with the stock, however.

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